The ipo process includes filing a registration

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Unformatted text preview: stage and later-stage companies that they hope to take public in order to cash out their investments. The first public issue of a firm’s stock is called an initial public offering (IPO). The company selects an investment banker to advise it and to sell the securities. The lead investment banker may form a selling syndicate with other investment bankers to sell the issue. The IPO process includes filing a registration statement with the Securities and Exchange Commission (SEC), getting SEC approval, promoting the offering to investors, pricing the issue, and selling the shares. Stock quotations, published regularly in the financial media, provide information on stocks, including calendar year change in price, 52-week high and low, dividend, dividend yield, P/E ratio, volume, latest price, and net price change from the prior trading day. Understand the concept of market efficiency and basic common stock valuation under each of three cases: zero growth, constant growth, and variable growth. Market efficiency, which is assumed throughout the text, suggests that there are many rational investors whose quick reactions to new information cause the market value of common stock to adjust upward or downward depending upon whether the expected return is above or LG4 CHAPTER 7 Stock Valuation 339 below, respectively, the required return for the period. The efficient-market hypothesis suggests that securities are fairly priced, that they reflect fully all publicly available information, and that investors should therefore not waste time trying to find and capitalize on mispriced securities. The value of a share of common stock is the present value of all future dividends it is expected to provide over an infinite time horizon. Three dividend growth models—zero-growth, constant-growth, and variable-growth—can be considered in common stock valuation. The basic stock valuation equation and these models are summarized in Table 7.6. The most widely cited model is the constant-growth model. Book value per share is the amount per share of common stock that would be received if all of the firm’s assets were sold for their book (accounting) value and the proceeds remaining after paying all liabilities (including preferred stock) were divided among the common stockholders. Liquidation value per share is the actual amount per share of common stock that would be received if all of the firm’s assets were sold for their market value, liabilities (including preferred stock) were paid, and the remaining money were divided among the common stockholders. The price/earnings (P/E) multiples approach estimates stock value by multiplying the firm’s expected earnings per share (EPS) by the average price/earnings (P/E) ratio for the industry. Discuss the free cash flow valuation model and the use of book value, liquidation value, and price/earnings (P/E) multiples to estimate common stock values. The free cash flow valuation model is appealing when one is valuing firms that have no dividend history, startups, or operating units or...
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This document was uploaded on 01/19/2014.

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